Texas may discover gold isn't all profit

1of 2Texas Gov. Rick Perry, seen here in Iowa running as a conservative for the Republican Party's 2012 presidential nomination, has said that he wants to relocate the state's gold to a newly created Texas Bullion Depository.Photo: Charlie Riedel / Associated Press

2of 2Ben Bernanke was the target of Gov. Perry's campaign rhetoric when Perry suggested that the Fed chairman would be committing treason should the Federal Reserve print more money.Photo: Andrew Harrer / Bloomberg

Texas has generally been at the front of the pack of a certain variety of uber-hawkish, vaguely paranoid monetary policy talk over the past few years. Recall it was the state's governor, Rick Perry, who while running for president strongly suggested that Ben Bernanke would be committing treason should the Federal Reserve print any more money.

But now some in the state, including Perry, are looking to put their money where their mouths are. Literally.

Perry and some in the Texas Legislature want to bring the roughly $1 billion worth of gold held by the state university system's investment fund onto Texas soil, rather than in its current resting place in a vault in New York.

“If we own it,” Perry said on a conservative radio show last week, according to the Texas Tribune, “I will suggest to you that that's not someone else's determination whether we can take possession of it back or not.”

Here's the thing. Perry's push to relocate the state's gold to a newly created Texas Bullion Depository in a strange way makes perfect sense. It lays bare the rationale for investing in the yellow metal to begin with, and is an excellent illustration of the strange role that gold plays in a modern economy and investors' psyches.

Some basics: People speak of gold as an investment, but that's not quite right. When you buy shares of a company's stock, you are buying a claim to the future profits of that company. When you buy a Treasury bond, the U.S. government is pledging to pay you a certain amount of money on a certain schedule in the future. But when you buy a 1-ounce ingot of gold, no matter how long you will hold it, you still have exactly one ounce of gold.

In fact, if anything, gold has a negative yield, because you have to store that gold somewhere. If you keep it in your house, there is a risk of theft. If you keep it in a safe deposit box at the bank, you will pay a fee.

If Texas moves its gold back home, it will deal with this in a very real way: Whatever it costs to build, maintain and guard a facility secure enough to stash $1 billion of gold in will essentially subtract from whatever investment return the holdings offer.

(The lawmaker advocating the plan pointed out that only about 20 square feet of space would be needed for the gold as evidence that the cost shouldn't be high, which kind of misses the point. It's not the real estate cost that is expensive, it's the technology and manpower needed to prevent the heist of the millennium).

Texas media outlets have reported that the state's gold is held at the Federal Reserve Bank of New York, though that is inconsistent with the bank's rules on who may use its vaults, which is limited to national governments, central banks and international organizations. But all the financial institutions that store gold, whether the New York Fed or commercial banks, invest vast sums to ensure the security of their vaults. Texas is considering replicating those security costs and giving up that convenience. But why?

The most common reason to buy gold is as something of an insurance policy against some very bad events, like a bout of significant inflation. In the more plausible scenarios, like a return of a 1970s-style period of 10 percent or so annual price increases, gold would indeed likely prove to be quite a good investment. But in that scenario, the state of Texas would have no problem getting access to its gold stored underneath the New York Fed. There would be no need to go to the trouble and expense of setting up a miniature Fort Knox in Austin.

For it to make sense to go to all that hassle of storing your own gold, you have to be insuring against some much darker possibilities, like a collapse of the U.S. government and monetary system, and/or Texas making a (second) bid to secede from the United States.

In some episode of hyperinflation and U.S. government collapse, as the nation falls into a Hobbesian state of nature, paper dollars will be no good, but gold would likely be the medium of exchange for buying food and guns and whatever else is needed for Texas to prosper amid the post-apocalyptic landscape.

Similarly, if Texas were to decide that enough was enough and it wished to no longer be part of the United States — a notion that Perry himself seemed to joke about in 2009, saying, “When we came in the union in 1845, one of the issues was that we would be able to leave if we decided to do that” — one could imagine the desirability of having its gold supply close to home. That would put New York banks, regulated by the U.S. government, in the difficult position of having to determine whether the rebel republic of Texas was the rightful owner of the gold in its vault.

Texas, it is worth noting, is not the only large, prosperous place with a hard-money mentality to look to keep its gold close to home. Earlier this year, Germany's central bank said it will relocate billions worth of gold from vaults beneath the New York Fed and French central bank, guarding them in Frankfurt rather than entrusting them to central banks elsewhere.